FATCA: Causing confusion among Expats around the World

FATCA is stirring a wave of confusion among U.S. expat communities around the world. As of this article, roughly 110 countries are either on-board with FATCA, or having active discussions with the United States.

Mexico has signed FATCA agreement with the U.S. (as of November 4, 2013). Local banks will soon report account information of U.S. citizens to the Mexican tax authority, which will forward the information to the IRS.

Question #1: What exactly is FACTA?

FATCA stands for Foreign Account Tax Compliance Act. Under FATCA, foreign banks are required to report account information owned by U.S. citizens to the IRS.

Question #2: I have a local bank account in Mexico. How does FACTA impact me?

You are required to report the foreign earned interest on your U.S. income tax return. Prior to FATCA, the reporting of foreign earned interest was based on an honor system. With FATCA, IRS computers will receive your account information, and will reconcile it against your tax return. Identifying delinquent taxpayers will be an automated process.

Question #3: My bank is asking me to complete a W-9 form. What should I do?

The critical information captured on the W-9 is one’s social security number. With the SSN, the IRS can match foreign bank account information with a U.S. tax return. There is no legal requirement to complete the W-9. However, your bank will probably close your account if you do not comply.

Question #4: Are there other reporting requirements?

In addition to reporting foreign earned interest, you may need to file informational reports (above certain balance thresholds – see below). There are two such reports: FBAR (FincCen 114) and Form 8938.

The $10,000 threshold is met if the aggregate balance (combining all the accounts) exceeds $10,000 at any point during the year. The FBAR is a separate from your income tax filing, and the due date is June 30th of each year (with no extensions). Account balances need to be converted to U.S. dollars, using the F/X rate as of the last day of the year. Failure to report (non-willful) carries apenalty up to $10,000. Willful non-compliance potentially raises the penalty up to $100,000 or 50% of the taxpayer’s foreign assets (whichever is greater).

Overview of Form 8938

The FATCA reporting requirement is part of a broader effort by the U.S. government to combat offshore tax evasion. Form 8938 is included with your income tax filing. All U.S. persons who receive proceeds from foreign financial accounts that have an aggregate balance exceeding certain thresholds are required to file this report:

The threshold for expats filing an individual tax return is $200,000 aggregate balance on the last day of the year, or $300,000 aggregate balance at any point during the year;

The threshold for expats filing a joint tax return is $400,000 aggregate balance on the last day of the year, or $600,000 aggregate balance at any point during the year.

The maximum penalty for failing to file Form 8938 is $60,000 for each foreign asset that you failed to report (even more onerous than for the FBAR).

Bottom line: It is absolutely in your best interest to get tax-compliant.

1 Comment on this post

I am in the process of opening up a Perfiles account at Banamex.
The bank officer informed me that now there is an additional step involved in approving my new account. Banamex will be sending a representative from a private company to visit my house and take pictures of the outside of the premises and perhaps the inside, and a picture of my face. If I refuse, they will not approve the account. That is now required, I was told, of all foreigners regardless of the type of account and even Mexican nationals who establish a business account.

Pretty invasive..and it is now nine working days later and the agent has not shown up to take my pictures!!

Whether this is a FATCA-influenced decision, I have no idea. Supposedly, it is a directive issued by the central bank of Mexico to help deal with money laundering. Also, all Mexican banks will soon be following suit.